NFT: Understanding the new technology in the world of digital assets

NFTs are virtual tokens that use blockchain technology to record proof of ownership of pretty much anything unique or scarce – such as collectible playing cards to digital artwork.

NFTs – non fungible tokens – have exploded in popularity as a way for creators to monetise artwork, songs and images in a way that wasn’t really possible before. That’s because they are digitally certified with a unique signature that is practically impossible to forge.

What are NFTs exactly?

To really understand NFTs, let’s break down the acronym. NFT stands for non-fungible token.

The word that most people stumble over here is “fungible” – a technical term for one of the key properties of money. It means that one unit of any currency – for example, £1 or $1 – should be interchangeable for any other unit.

If I lent a friend a £1 coin, it wouldn’t matter if I got the exact same £1 coin back when they repaid me. Any other £1 coin is usable and holds the same value.

Things that are non-fungible, by contrast, are unique and not interchangeable for anything else.

A real-world comparison for something that is non-fungible would be a plane ticket, which is specific to a particular date and time. You couldn’t just swap it for a different ticket and expect to board a flight.

NFTs are best known as artworks, gifs or memes that online creators are selling by the truckload.

NFT sales hit $25bn in 2021, according to figures from NFT data specialist DappRadar. This surged from just $95m in 2020.

The most popular blockchain platform for NFTs, and the currency they are most often priced in, is ethereum, whose digital coin ether is the world’s second-largest crypto.

People buy NFTs and can store them alongside any other coins in an ethereum-enabled crypto wallet.

NFT art and the ‘internet of assets’

When NFT ownership is recorded on a blockchain, like ethereum, the information effectively can’t be altered.

One of the most obvious use-cases for NFT is in art, because of the difficulty that the art world has in proving ownership.

Forgery is common and remains an ongoing issue.

Collectors have come to the realisation that having an unfakeable digital representation of an asset is of serious real-world value. NFTs have attracted wealthy enthusiasts in the same way as rare first editions or any other hard-to-source object.

The inherent scarcity of these items lends them more value.

The first big auction house to enter the NFT market was Christie’s in October 2020, when it sold an artwork depicting bitcoin creator Satoshi Nakamoto for a record $131,250.

Instead of a canvas painting in a frame being delivered to the winning bidder’s home, ownership of the painting was represented by an NFT.

US rock band Kings of Leon were one of the first to sell an album as a collection of NFTs. The band made more than $2m in music sales using this method when the record was released in March 2021.

Are NFTs a good investment?

It has been reported that venture capital funds are ploughing millions into NFTs. Andreessen Horowitz and Paradigm, two of the largest cryptocurrency fund managers, begun investing directly in NFTs in May 2022.

If you want to invest in NFTs, you need to understand how they work and why you are buying one in the first place.

NFTs can command vast sums, so there is potentially money to be made – as well as money to be lost.

Some notable auctions of NFTs include:

  • The first-ever tweet of Twitter chief executive Jack Dorsey, which sold for $2.9m
  • The original source code for the World Wide Web, created by the inventor of the modern internet Sir Tim Berners-Lee. That NFT sold for $5.4m in June 2021.
  • A collection of digital images compiled by digital artist Beeple, collected over 5,000 days, which sold for almost $70m through auction house Christie’s in March 2021.

But unlike assets, such as stocks and shares, where price movements may well be influenced by the performance of the business, NFTs have no underlying asset and prices depend purely on demand.

These digital assets are only worth what someone else is willing to pay, and the prevailing market conditions.

What’s the point of NFTs?

The key thing to note with NFTs is that they can permanently and securely record ownership of any item in a verifiable way – which was practically impossible before – making them highly tradeable.

That’s why some auctions are running into the hundreds of thousands of dollars. Even big businesses such as card giant Visa are snapping up rare collectibles.

NFTs can also be used as collateral to get a loan in the crypto world for purchasing virtual real estate in online-only venues such as Decentraland.

Generative art

Some of the most popular NFTs include in-game items and generative art — AI-made artworks. Programmers feed a set of parameters into a computer and the AI creates the picture using that algorithm.

This “creative coding” creates new artworks on platforms such as Art Blocks.

What is the environmental impact of NFTs?

Many of us have concerns about the environmental impact of cryptocurrency “mining” and transactions, given headlines suggesting that the creation of bitcoin uses more energy than Argentina annually.

NFTs use predominantly ethereum, rather than bitcoin, but the two blockchains share similar properties — for now.

Ethereum is in the process of switching away from the “Proof of Work” system where people have to expend vast amounts of costly computing power in crypto mining to secure its network.

The Ethereum Foundation estimates that the new version of ethereum (called ethereum 2.0) will use 99.95% less energy when the switchover is complete.

But that could take some years yet.

Can I make money as a creator selling NFT art?

It’s perfectly possible to make money selling NFT art. Even beginners can start monetising the content they create or assets they own — from digital art to domain names and songs.

Buyers pay in ether (ETH), so you will have to set your own auction price in ETH. At the time of writing, one ETH is worth £2,259.

Striking original artwork that could go viral, and rare items from well-known artists, are among the top-sellers.

OpenSea is one of the most popular art marketplaces. The best-sellers could earn hundreds of thousands of dollars in ETH a day, depending on what’s hot that week, although this is rare.

Most sales are for $200 or less, before fees, making NFTs more a side-hustle than a get-rich-quick scheme.